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Question: Is software an expense or capital asset?

Random question alert! And this is a good one. I get asked this all the time.

“Is software an expense or capital asset?”

First, you should refresh yourself with my Magic Rule #1, which says if it costs less than $400 put it in your Office Expenses envelope and go do something fun instead of worrying about it.

Still here?

So, it cost more than $400. Well then, if it is software for running your computer (operating systems, etc.) then it is treated just like a computer. Which is a capital asset. But, read on for the good news.

Traditionally, software was something that was expensive and tended to last more than a year (ie. a perfect example of a capital asset). So CRA wanted businesses to capitalize it and only write off a portion each year. For example, any computer or related operating software bought before March 19, 2007 had to be capitalized and written off at 45% per year.

Lately, however, they realize that some people buy a new computer almost every year, and with it, new software. So CRA is leaning towards the “why bother capitalizing it” point of view. Which also happens to be my view.

However, CRA is a little shy to just come out and call it an expense. So they make us capitalize it but allow us to write off the entire 100%. See below for how they word it a little differently.

Why do they do this? Because it allows them to go back and change the write-off % whenever they feel like it.

Remember, I’m talking about normal off-the-shelf software programs. If you have some hugely expensive specialized, super-duper, custom designed software that you paid thousands for, you will have to capitalize it and claim capital cost allowance on it each year. Providing of course it is not obsolete within a year.

“Class 52 (100%)

Include in Class 52 with a CCA rate of 100% (with no half year rule) general-purpose electronic data processing equipment (commonly called computer hardware) and systems software for that equipment, including ancillary data-processing equipment if acquired after January 27, 2009, and before February 2011, but not including property that is principally or is used principally as:

not have been used, or acquired for use, for any purpose before it is acquired by the taxpayer;

be acquired by the taxpayer:
– for use in a business carried on by the taxpayer in Canada or for the purposes of earning income from property situated in Canada; or
– for lease by the taxpayer to a lessee for use by the lessee in a business carried on by the lessee in Canada or for the purpose of earning income from property situated in Canada.”

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This is brilliant info. Thanks. What happens with software as a service? I use 3 pieces of software … all clud based…nothing ever gets downloaded to my business pc. The software companies that make them are US based but my business and PC s are all in Canada. Cost is typically $ 30/month for each program, on a month to month basis (not leased).

Good question AJ. Since you pay every month and you don’t really “own” the cloud-based software programs, you should be able to expense the full amount (meaning you don’t need to capitalize it and claim capital cost allowance each year to write off a certain %). I would put the full amount you pay for these programs and put them in an expense category. It doesn’t really matter which one you choose, but try to pick one of CRA’s categories on the T2125 form that is closest to what the program actually does for you. For example, if it is an accounting-related program, put it in Office Expenses. If it is something that tracks client information, put it in Advertising. You could even put it in the “Business tax, fees, licenses, dues, memberships, and subscriptions” if you think it is some kind of a subscription. Good luck!
jk

I LOVE TAXES. For 6 months of every year, I manage the Personal & Small Business Taxation Department of a Chartered Accounting firm. I file over 170 complicated Canadian tax returns for our clients every year. For the other 6 months, I am a fiction writer and small business consultant who helps his friends with their late-filed tax returns.

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